Insight: For Cisco and Huawei, a bruising rivalry reaches stalemate

By Jeremy Wagstaff, Sinead Carew and Jim Finkle

10 Min Read

A man walks past a Huawei company logo outside the entrance of a Huawei office in Wuhan, Hubei province, October 9, 2012.Stringer

(Reuters) - Cisco Systems Inc and Huawei Technologies Co, two of the world's largest communications equipment makers, have been slugging it out for a decade now - in court, in emerging markets, in the lobbies of government and even on blogs.

The past year suggests they've ground to an expensive stalemate, raising questions about their futures on each other's lucrative home turf.

Earlier this month Cisco CEO John Chambers admitted in an earnings call that political dynamics were stymieing his company's long march into Huawei's backyard.

Asked whether the recent U.S. spying scandal was affecting overseas business, Chambers said it was having an impact, particularly in China, which is Cisco's biggest emerging market country but represents less than 5 percent of its total revenue.

Huawei has also admitted something of a defeat in the United State for carrier equipment, which accounts for more than 70 percent of its global revenues.

"We are not interested in the U.S. market anymore," Eric Xu, one of Huawei's rotating CEOs, said in April. "Generally speaking, it's not a market that we pay much attention to."

The rivalry reflects how intertwined the communications industry has become with growing concerns about security - and the challenges two communications giants face in building a genuinely global presence in an interconnected world where no major market can be ignored.

RAW WOUNDS

It wasn't always like this. Cisco, dominant in building the hardware that links computers and networks since the early 1990s, took little notice of Huawei until it suspected that the Chinese upstart was reverse-engineering its products.

It sued the company in 2003 for patent infringement, only settling after Huawei agreed to make changes to its equipment.

The wounds are still raw: last year the two sides again aired their grievances against the other, each claiming victory in the original suit.

California-based Cisco, former executives said, refused to take Huawei seriously despite warnings that they were making headway in emerging markets with cheaper equipment.

"For years San Jose pooh-poohed Huawei until it started hurting in post-2008," said one former executive.

When Cisco did respond, it was by partnering with ZTE Corp, Huawei's local rival, but that relationship went sour and was formally disbanded in 2012.

In the meantime Shenzhen-based Huawei made headway not only into the low-end routers and switches business, but was also eating into Cisco's home terrain of higher end equipment.

"When a competitor's gear gets good enough, not as good or as secure, then a lot of customers were prepared to go with that," said another former Cisco executive.

CHINA CARD

For Chambers, the holy grail had long been China. He said in an interview with Reuters last year that he had been visiting the country for 25 years.

To a group of Asian journalists visiting Cisco's headquarters in June 2005 he said: "If I wasn't American, I would be Chinese," according to a Xinhua news agency report.

In late 2007 he flew to Beijing to pledge $16 billion worth of investments in China over the next 5 years during which time, Chambers said, Cisco's manufacturing in China would double.

By 2009 it had invested in more than 50 Chinese companies. A Cisco s

But there has been little to show for it. Cisco's share of the carrier business - selling switches and routers to service providers - has remained steady in Europe at around 40 percent and has risen in the Middle East, Africa and Latin America in recent years, but has fallen in Asia, according to data from Ovum, a research consultancy.

In China it fell from 19 percent in the second quarter of 2010 to 12 percent in the same quarter this year.

One former executive who used to travel overseas with Chambers said he would argue in vain with the CEO about the dangers of overinvesting in China, saying his expectations were too ambitious.

"John thought he could get more out of it than even a sober assessment at the time suggested couldn't be done," he said.

For sure, many Western companies have found China harder going than they'd anticipated, but Cisco's poor performance in China stands in contrast to Huawei's growing market share.

In equipment for service providers, for example, Huawei's revenues grew by 84 percent between the second quarter of 2010 and this year, against Cisco's 2.5 percent, according to Ovum data. While Cisco's market share shrank, Huawei's grew from 56 percent to 64 percent.

SUSPICIOUS MINDS

And things aren't likely to get better any time soon. In the wake of Edward Snowden's revelations about the extent of U.S. National Security Agency electronic spying programs aimed at China, among other countries, some Chinese media have questioned Cisco's credibility.

"Although the company has issued statements saying that it is not involved in monitoring citizens or government communications in China or anywhere else, recent events mean that it may be quite a long time before we can trust Cisco again," wrote the Beijing-based Global Times on June 20.

One Beijing-based source in the technology industry who declined to be identified because of the subject's sensitivity said China's desire to eliminate any dependence on foreign technology wasn't new, but that the NSA revelations had fostered a new sense of urgency.

"I'm not sure the government has fundamentally changed course, but they now have the wind at their backs," he said.

MIRROR IMAGE

Cisco's woes in China are in some ways a mirror image of what Huawei has been enduring in the United States - albeit more openly.

Last year the U.S. House Intelligence Committee released a report urging U.S. telecommunications companies not to do business with Huawei and ZTE because it said potential Chinese state influence on the companies posed a security threat.

Both Chinese companies have denied that they have links to the Chinese government.

Huawei has spent heavily on lobbying lawmakers and other U.S. officials: $1.2 million in 2012, more than double what it spent in each of the previous four years, according to Senate lobbying records.

Snowden's revelations, however, have offered the company a chance to turn the spotlight back on its rival.

While Huawei has for the most part avoided linking Cisco to the NSA allegations, its security chief John Suffolk asked rhetorically on his blog whether "all other Governments ban American technology companies, especially Cisco and Juniper given their position in critical infrastructures?"

When Cisco's spokesperson John Earnhardt posted a denial of any involvement in government monitoring to the blog, Suffolk replied that Cisco should not be surprised if customers and governments "now pose questions about American tech vendors who hold a position where they have the means of contributing to NSA's strategic arsenal of tools and techniques to exfiltrate data on their targets".

Cisco declined to comment directly on Suffolk's remarks. Huawei confirmed the blog was written by Suffolk.

NO BACKDOORS

Since then both sides have said little about the other. Suffolk declined to be interviewed about his comments, and a Huawei white paper on cyber security published in October made no direct reference to Snowden or the NSA.

Indeed, some argue it's in neither company's interest to prolong discussions that link their industry to their respective government's eavesdropping efforts.

Both sides have distanced themselves from any calls to have the other's equipment banned on security grounds.

Huawei spokesperson Scott Sykes said in response to emailed questions that "Huawei advocates transnational, fair and open competition." Cisco denies lobbying Congress against Huawei on security issues, and has not "provided any government agency access to our networks".

And neither is there any concrete evidence that either company has added backdoors in their equipment to allow governments access.

This, said Jim Lewis, a senior fellow at the Center for Strategic and International Studies, a Washington-based think tank, was deliberate in the case of U.S. companies.

As an official at the Department of Commerce, Lewis helped the Clinton administration adopt a policy of not requesting companies to install backdoors.

In any case, Lewis said, the United States and at least three other countries had the expertise to eavesdrop with or without a backdoor. "If they want to get into your traffic, they are going to get in into your traffic."

Felix Lindner, CEO of Berlin-based Recurity Labs, a respected expert on both Cisco and Huawei security, says both companies' equipment contained software that was so poorly written it left them vulnerable to hacking.

"In terms of product security they are very much on a par with each other."

Both companies say they take security seriously. Huawei's Sykes said that "our experts immediately start investigations into potential problems and should there be any security risk we will provide a solution as soon as possible".

Cisco has pointed to security as a commercial advantage in its sale pitches.

An internal Cisco sales document obtained by Reuters dated June 2013 highlighted security flaws in Huawei's low-end routers uncovered by Lindner. The document said: "Huawei also has demonstrated lack of process to communicate and manage such security vulnerabilities."

Whatever the truth, concerns over security and their perceived government links have hobbled both companies in the other's homeland.

For now, Huawei has focused in the U.S. on its handset and enterprise business. And Cisco spokesperson Earnhardt said that despite the poor results "we remain firm in our commitment to China."

Doing anything else, said Naresh Singh, a principal analyst at IT consultancy Gartner, was not an option: "Cisco will have to address China because it's a very large market, and it's growing."